Time for globalisation 2.0?

Since the last US presidential election in 2016, globalisation has taken a step back. Trade conflicts, heightened tensions in the Middle East and a general rise in populism have jeopardised the globalisation process seen in recent decades.

While increased globalisation has helped reduce the gap between developed countries and emerging ones, it has triggered more inequality in the developed world.

A shift in the global order

The next twelve months will be pivotal for the global political order. There are a string of events or developments that could tilt globalisation towards an increasingly contentious relationship between countries or towards a more conciliatory framework.

In other words, will the rise of populism persist or will the trend peak and even start to reverse? Whatever the outcome, the globalisation process is entering a second stage that still needs to be designed.

The US presidential election race, the final outcome of Brexit and the development towards more or less cooperation in the European Union will be key events for financial markets in 2020. The outcome of each has the potential to support or derail them.

A more fragmented global order, with countries embattled in trade tensions, is one that does not foster confidence and increases uncertainty. We saw this in 2019, resulting in a lack of investment that is usually only seen during periods of global recession.

On the contrary, a more cooperative environment resulting in less friction and uncertainty would likely lift some of the risk premium weighing on the assets most affected by the tensions.

Too much uncertainty for now

Whichever way changes to the global order play out, it will create tactical opportunities across asset classes. But for the time being, the direction of travel remains unclear. So we prefer to err on the side of caution and steer away from areas that are suffering the most and could suffer even more if the world economy becomes more fragmented.

While consumers cannot remain completely insulated from escalating trade tensions, it is nonetheless one area of strength that we prefer. This is particularly true in the US, where the fundamentals remain healthy. It is also the case in emerging markets (EM), where the trend of a growing middle class continues to inexorably materialise. In this context, we like consumer discretionary and communication services.

Another result of the US’s more confrontational rhetoric is the slow, but noticeable, shift to gold and away from the dollar, particularly on the part of EM central banks. With real yields close to a record low, there is sense in holding gold as a diversifier in a portfolio, in case globalisation as we know it collapses.

Throughout 2020, we will adjust those views depending on the direction that globalisation 2.0 takes.

Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.

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